Business context and reporting period
Essential Properties Realty Trust, Inc. (NYSE: EPRT) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. The company owns and manages primarily single-tenant, long-term net-leased properties serving middle-market businesses. At quarter-end, its portfolio included 1,561 properties and loan-collateral properties, 322 tenants across 46 states, $267.1 million of annualized base rent, and 99.9% occupancy. Service-oriented and experience-based businesses generated 93.0% of annualized base rent.
Financial and operating results
Amounts below are in millions except per-share data; comparisons are with the corresponding 2021 period.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $71.4 | $57.1 | $141.6 | $105.6 |
| Income from operations | $45.2 | $35.7 | $83.6 | $58.8 |
| Net income attributable to stockholders | $35.7 | $23.3 | $62.4 | $38.6 |
| Diluted net income per share | $0.27 | $0.20 | $0.48 | $0.34 |
| Cash provided by operating activities | Not presented quarterly | $102.0 | $69.3 | |
| Cash used in investing activities | Not presented quarterly | $(325.8) | $(385.2) | |
| Cash provided by financing activities | Not presented quarterly | $190.3 | $412.6 |
For Q2, rental revenue grew 26.2%; net income attributable to stockholders increased 53.1%. Growth in the portfolio and rent escalations drove higher rental revenue; gains on property dispositions also contributed to operating income. Six-month AFFO, a non-GAAP measure, was $99.6 million versus $72.4 million. Q2 cash NOI was $64.3 million, compared with $52.0 million; the company defines cash NOI as a non-GAAP property-level measure.
At June 30, 2022, total assets were $3.59 billion and total liabilities were $1.32 billion. Debt principal outstanding was $1.248 billion, up from $1.174 billion at year-end 2021. Net debt was $1.222 billion, versus $1.114 billion at year-end. Cash and cash equivalents were $18.0 million, with another $8.2 million restricted; unused revolving-credit capacity was $382 million. Weighted average debt maturity was 5.4 years. Management reported compliance with debt covenants and said long-term debt was fixed-rate or effectively fixed through hedges; the revolving facility remains exposed to floating rates.
Material changes versus the prior comparable period
- Six-month total revenue increased 34.0%, largely reflecting portfolio growth; net income attributable to stockholders increased 61.6%.
- Portfolio investments increased to 1,561 from 1,451 at year-end 2021. The company invested $360.5 million in real estate acquisitions and additions during the first half.
- Six-month real estate impairment charges rose to $10.2 million from $6.1 million. Interest expense increased to $18.4 million from $15.5 million, mainly due to higher average debt.
- In February 2022, amendments extended the revolving facility maturity to 2026 and amended term-loan pricing and reference rates; the company recorded $2.1 million of debt-extinguishment loss in the first half. In April, it established a new $500 million ATM equity program and issued $32.6 million of gross proceeds under it during Q2.
- The quarterly common dividend increased to $0.27 per share from $0.25 in the comparable 2021 quarter.
Outlook, commentary, risks and unusual items
The filing provides no quantified earnings or investment guidance. Management said cash from operations, cash balances, revolver capacity, and access to capital should fund operations and current commitments for the foreseeable future. It expected to fund the remaining portion of $134.8 million in tenant construction and reimbursement commitments by June 30, 2023. At July 27, the company was under contract to acquire 22 properties for $60.6 million, subject to due diligence and customary closing conditions.
After quarter-end, the company invested $36.8 million in six properties, committed $3.9 million to construction and tenant reimbursements, and invested $5.0 million in mortgage loans. On July 25, it amended its credit agreement to add a $400 million 2028 term-loan tranche; $250 million was drawn, with up to $150 million available for delayed draw subject to conditions. This is subsequent-period financing, not debt outstanding at June 30.
Unusual or notable items included $6.3 million of Q2 impairment charges, $10.1 million of Q2 gains on real estate dispositions, and $0.4 million of Q2 loan prepayment fees within other revenue. The six-month impairment charge related to seven properties (six tenanted and one vacant). Management said COVID-19 impacts had significantly diminished in 2022 but could recur. Key risks include tenant financial deterioration or default, real estate and capital-market conditions, rising interest rates, refinancing and capital access, acquisition competition, and maintaining REIT status. The filing reported no material pending legal or regulatory proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether tenant operating performance and rent coverage support continued rent collection and the reported 99.9% occupancy; portfolio weighted-average rent coverage was 4.0x.
- Drivers and potential recurrence of impairment charges, particularly for the affected properties, and the recoverability of loans and tenant commitments.
- Debt costs and exposure as floating-rate revolver borrowings and post-quarter term-loan draws change; the filing estimates a 100-basis-point adverse rate move would expose the revolver to about $2.2 million of annual interest-cost impact.
- Funding needs for planned acquisitions and tenant commitments, reliance on equity issuance, and resulting shareholder dilution.
- That AFFO, cash NOI, and leverage measures are non-GAAP; assess their reconciliations and definitions alongside GAAP results and operating cash flow.